What might sound good really doesnt work

What might sound good really doesnt work

The Evil of Taxing the Rich

by Fred E. Foldvary, Senior Editor

Welfare-state liberals, fiscally aggressive progressives, and taxaholic Democrats seek higher taxes on the rich and on big corporations. They think that the rich have more money than they need, so why not tax it and share the wealth. They say poor folks need the money more than the rich. Some economists and utilitarian philosophers buttress the tax the rich argument with the academic doctrine that the marginal utility of money, i.e. the value of extra amounts, is less when one is rich than when one is poor. So, they say, we increase social welfare by forcibly transferring money from the rich to the poor.

For example, the fiscal program of Democratic presidential candidate Barack Obama states, Reverse Bush Tax Cuts for the Wealthy: Obama will protect tax cuts for poor and middle class families, but he will reverse most of the Bush tax cuts for the wealthiest taxpayers. Hillary Clintons web site states that the Wealthy should go back to paying pre-Bush tax rates and that we should take things away from rich for common good.

According to IRS data, the top 50 percent of wage earners pay over 96 percent of income taxes, the top 25 percent pay 82 percent of income taxes, the top 10 percent pay 65 percent, the top 5 percent pay 53 percent, and the top 1 percent pay 34 percent of income taxes (the numbers are rounded to the nearest percent). The wealthy already pay almost all the estate tax and most of the corporate and individual income tax.

Whats wrong with taxing the rich more? The dimensions of the problem are economic, ethical, and governmental. The economic case against taxing the rich is familiar to any student taking a first course in economics. Higher taxes on goods or labor raise their costs, and therefore reduce their quantities. This reduction in output, income, and investment is called the deadweight loss or excess burden of taxation, and has been estimated to be over $1.5 trillion per year. Since this waste of resources goes on every year, slowing down economic growth, the cumulative deadweight loss becomes greater than the whole economy.

The effect of taxes on decisions comes from the marginal tax rate, the tax rate on extra income or spending. Moreover, the deadweight loss increases by much more than the increase in tax, so higher marginal tax rates on the rich result in much less investment, entrepreneurship, and production, and that ends up hurting all society, including the poor. Critics say that there was investment and economic growth even when tax rates were higher, but that does not contradict the even higher growth and output that would take place with a lower deadweight loss. The economy could grow at six percent rather than only three percent. Indeed, the tax cuts of the Kennedy and Reagan administrations did result in higher growth than before.

The moral case against taxing the rich is that if they earned the money with their labor, it is morally wrong to take away their earnings by force. To the creator belongs the creation. If we dont own our own wages, we dont own our labor, and we dont own ourselves. We become slaves if others can force us to labor for them. This, of course, is an moral condemnation of all taxation of wages, produced goods, and transactions, regardless of how rich one is.

The governmental dimension is that taxing the rich corrupts the state. Tax codes enable the rich to set up tax shelters, to shift income to lower-taxes places, and to take advantage of tax credits, deductions, and exemptions. Much of the financing of political campaigns comes from the wealthy, so in the end, politicians must cater to them with tax loopholes and with subsidies. What they take with one hand, they give back with the other, and even more. Rich farmers pay high taxes but also get big subsidies, so they can get more than their money back. Corporate welfare pays back a big chunk of the tax paid. Big executives still get their fat stock options, back-dated, future-dated, and blank-dated.

The biggest subsidy of all is not in the form of cash, but is so invisible and implicit that few folks notice it, and even economists are not conscious of it. It is the gigantic land-value subsidy of government spending. Public works and civic services pump up and rent and land value, and landowners pay only a tiny portion of the bill in property taxes on land. Land rent being about 20 percent of national income, there is in the $14 trillion US economy about $3trillion in annual land rent, which about equal to the total US budget. The US budget is dishonest, because it tells us how much taxes the rich pay, but not how much subsidy they get, so we dont see the net loss or gain.

Heres the kicker that even your econ book wont tell you. Most taxes come out of land rent! When taxes make business less profitable, they bid less for the use of land. What a firm would have paid in rent, it pays in tax. The form of the tax is on profits, but the substance is rent. The company is not really paying the tax. The landlord is paying, by getting less rent.

But by taxing the corporations and the wealthy executives, income and sales taxes also fall on labor and consumption, and that creates the excess burden or deadweight loss. Since taxes come from rent anyway, the government could directly tax the rent, which would eliminate the deadweight loss. The greater and tax-free output would create a quantum leap of higher rent, which would provide all the tax revenue government now takes for spending on goods.

The advocacy of one policy implies a rejection of other policies. When politicians call for higher taxes on the rich, they reject the better alternatives of taxing pollution and land. Why dont they advocate taxing pollution and land instead? Because they exploit the ignorance of the public, because it sounds good to share the wealth. Almost all these welfare-state liberals want to give back much of the taxes paid by the rich in the form of hidden land-value subsidies. So in the end, tax the rich is not only destructive, but dishonest. Tax the rich is an evil political lie.

Copyright 2008 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.Also see:

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8 Responses to What might sound good really doesnt work

“… higher marginal tax rates on the rich result in much less investment, entrepreneurship, and production …” ?

1.This arguement is a favorite of the securities community but really only applies to new (IPO) or secondary issues – practically all trading based on $ volume is between shareholders & doesnt meet your objectives mentioned above.

After reading some of the protest responses to this artical, I have to believe it was written upside down. Taxation is a very emotional issue as Georgists with the actual logic know. So there has to be an emotional hook. Which Fred provides at the end. But all the way up to that point his arguement exactly mirrors the same anti tax rhetoric that has been defending right wing privilege for decades. My bet is that none of those writing protest letters either read to the end or understood the final point that taxing land is the only moral and effective tax.

Georgists are Johnny one notes on this, so its understandable to want to mix it up a bit, but lets not forget who we are targeting in our communications and that they are far more susceptable to a flow of emotion then logic.

I also think Jefferys rebuttals should have mentioned the final point rather then opening another.

Without disecting your arguments, it appears that you rely on obscure economic theory, which is just that. Many a wayward policy was adapted after believing in platitudes like free enterprise is good. Left to itself all men will ultimately practice price fixing, dumping and predatory practices making real competition non-existent. That is why we have referees in sports. Speaking as one who is rich by some standards, and came from nothing, I find your arguments overly simplistic. Anybody who believes that incremental taxation is bad is without a conscience. The problem with any government is people who believe unfettered greed is a social good. They are usually the ones that also claim to be good Christians, hardly what Christ taught. Greed leeds to corruption. As one who has also suffered state taking under the rubric of civil justice by corrupt and/or careless judges, the root of our problems is not taxation it is greed that is applauded rather than checked by a common interest of holding our so-called public servants to a higher standard rather than none at all.

I, too, have given a good deal of thought to the restructuring of how the federal and state governments tax individual incomes and business profits. I actually submitted my proposal to the Bush appointed Commission on Federal Tax Reform.

We differ in our perspectives because I believe that the taxation of income ought to effectively capture unearned income flows derived largely from rent-seeking investment activities. In the absence of raising revenue by directly capturing rents, this requires, I argue, progressivity in the rates imposes on higher ranges of income. What is certainly statistically-proveable is that among recipients of higher and higher incomes, the proportion thereof attributable to rent-seeking investment behavior rather than the production of goods or delivery of services becomes the major source.

What I have proposed is best described as a “graduated flat tax” structured to free labor and capital goods derived income flows from the burden of taxation. My recommendation is that individual incomes up to the national median (and state median where state taxation applies) be exempt from income taxation. Above the median, higher ranges of income would be taxed at an increasing rate of taxation. The exact ranges and rates would be determined during the budget process in order to achieve a balanced budget.

For purposes of illustration only, assume the national medium is $50,000. Individual incomes up to this amount would be exempt. Note that the number of working individuals in a household is no longer a consideration. Incomes greater than $50,000 up to $100,000, might be taxed at 5%; greater than $100,000 up to $250,000, 10%; greater than $250,000 up to $500,000, 15%; greater than $500,000 up to $1 million, 20%; and greater than $1 million, 25%. No deductions or exemptions permitted. This structure combines simplification with progressivity, without being overly confiscatory. The rates imposed at the state level would, of course, be much lower unless there is a significant change in the nations attitude toward revenue sharing (i.e., from the states to the federal government rather than the reverse as is today the case).

I also propose that the national debt be significantly reduced and eventually retired by the refunding of maturing bonds with fully amortizing bonds. The new bonds would repay both interest and principal to the bondholders, so that at the end of the life of the bond there is no longer debt to be refunded. Servicing the national debt (now including principal repayment) would be factored into the calculation of how much revenue is needed to balance the budget. It is worth noting that under existing circumstances, government borrows from the wealthies among us then imposes taxes on people of much more modest means to raise enough revenue to pay interest to bondholders.

Similar principles ought to be considered regarding the taxation of businesses. To encourage the establishment of small businesses and cooperatives, we ought to replace the business profits tax with a graduated rate of taxation on gross revenue. Businesses with a gross revenue up to, say, $1 million would be exempt altogether. Above this level of revenue, low but graduated rates of taxation would be imposed. Companies with high overhead and expenses would be subjected to more intense competitive pressures to become efficient or lose market share. Just the reduction in cost of compliance would be enormous and encourage the redirection of financial reserves into the expansion of goods production or the delivery of services.

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Arts & Letters

Geonomics is …

a scientific look at how we divvy up the work and the wealth, how some of us end up with too much or too little effort or reward. That’s partly due to Ricardo’s Law of Rent, showing how wasteful use of Earth cuts wages. And it’s partly due to how a society’s elite runs government around like water boys, dishing out subsidies and tax breaks. While geonomists look political reality right in the eye, without blinking, conventional economists flinch. When Paul Volcker, ex-chief of the Federal Reserve, moved on to a cushy professorship at Princeton cum book contract, the crush of deadlines bore down. So Volcker asked a junior associate to help with the book. The guy refused, explaining that giving serious consideration to policy would ruin his academic career. The ex-Fed chief couldn’t believe it and asked the department chair if truly that were the case. That head honcho pondered the question then replied no, not if he only does it once. And economics was AKA political economy!

a study of Earth’s economic worth, of the money we spend on the nature we use, trillions of dollars each year. We spend most to be with our own kind; land value follows population density. Besides nearness to downtowns, we also pay for proximity to good schools, lovely views, soil fertility, etc. These advantages, sellers did not create. So we pay the wrong people for land. Instead, we should pay our neighbors. They generate land’s value and deserve compensation for keeping off ours, as they’d pay us for keeping off theirs. It’s mutual compensation: we’d replace taxes with land dues – a bit like Hong Kong does – and replace subsidies with “rent” dividends to area residents – a bit like Alaska does with oil revenue. Both taxes and subsidies – however fair or not – are costly and distort the prices of the goods taxed and the services subsidized. By replacing them and letting prices become precise, we reveal the real costs of output, the real values of consumers. Then, just by following the bottom line, people can choose to conserve and prosper automatically. A community could start by shifting its property tax off buildings, onto land – a bit like a score of towns in Pennsylvania do; every place that has done it has benefited.

one of many words I coined over 20 years ago: geoism, geonomics, geonomy, geocracy, etc – neologisms that later others came up with, too. CNBC once had a Geonomics Show, and Middlebury College has a Geonomics Institute. If “economy” is literally “management of the household”, then geonomy is “management of the planet”. The kind of management I had in mind is not what CNBC was thinking – top-down. My geonomics is not hands-on, interfering, but hands-off, organic. It’d strive to align policy with natural processes, similar to what holistic healing does in medicine, what organic farming does in agriculture. Geonomics attends to two key components: One, the crucial stuff to track is fat – or profit, especially profits without production, such as rent, or all the money we spend on the nature we use. Society’s surplus is the sine qua non for growth, needed to counter death – not merely more, but sustainable development, more from less. Two, the basic process to respect is the feedback loop. These let nature maintain balance automatically and could do the same for markets, if we let them. Letting them would turn our economies, now our masters, into a geonomy, our servant, providing us with prosperity, eco-librium (to coin a term) and leisure, time off – a hostile environment for economan but a cradle for a loving and creative humanity.

a discipline that, compared to economics, is as obscure as Warren Buffett’s investment strategy, compared to conventional investment theory, about which Buffett said, “You couldn’t advance in a finance department in this country unless you taught that the world was flat.” (The New York Times, Oct 29). The writer wondered, “But why? If it works, why don’t more investors use it?”
Good question. Geonomics works, too. Every place that has used it has prospered while conserving resources. Yet it remains off the radar of many wanna-be reformers. Gradually, tho’, that’s changing. More are becoming aware of what geonomics studies – all the money we spend on the nature we use. Geonomics (1) as an alternative worldview to the anthropocentric, sees human economies as part of the embracing ecosystem with natural feedback loops seeking balance in both systems. (2) As an alternative to worker vs. investor, it sees our need for sites and resources making those who own land into landlords. (3)As an alternative to economics, it tracks the trillions of “rent” as it drives the “housing” bubble and all other indicators. And (4) as an alternative to left or right, it suggests we not tax ourselves then subsidize our favorites but recover and share society’s surplus, paying in land dues and getting back “rent” dividends, a la Alaska’s oil dividend. Letting rent go to the wrong pockets wreaks havoc, while redirecting it to everyone would solve our economic ills and the ills downstream from them.
People must learn to stop whining so much and feel enough self-esteem to demand a fair share of rent, society’s surplus, the commonwealth.

more transformation than reform; it’s a step ahead. Harvard economics students this year did petition to change the curriculum, in the wake of the English who caught the dissension from across The Channel. French reformers, who fault conventional economics for conjuring mathematical models of little empirical relevance and being closed to critical and reflective thought, reject this “autism” – or detachment from reality – and dub their offering “post-autistic economics”. Not a bad name, but again, academics define themselves by what they’re not, not by what they are, unlike geonomists. We track rent – the money we spend on the nature we use – and watch it pull all the other economic indicators in its wake. We see economies as part of the ecosystem, similarly following natural patterns and able to self-regulate more so than allowed, once we quit distorting prices. To align people and planet, we’d replace taxes and subsidies with recovering and sharing rents.

a POV that Spain’s president might try. A few blocks from my room in Madrid at a book fair to promote literacy, Sr Zapatero, while giving autographs and high fives to kids, said books are very expensive and he’d see about getting the value added tax on them cut down to zero. (El Pais, June 4; see, politicians can grasp geo-logic.) But why do we raise the cost of any useful product? Why not tax useless products? Even more basic: is being better than a costly tax good enough? Our favorite replacement for any tax is no tax: instead, run government like a business and charge full market value for the permits it issues, such as everything from corporate charters to emission allowances to resource leases. These pieces of paper are immensely valuable, yet now our steward, the state, gives them away for nearly free, absolutely free in some cases. Government is sitting on its own assets and needs merely to cash in by doing what any rational entity in the economy does – negotiate the best deal. Then with this profit, rather than fund more waste, pay the stakeholders, we citizenry, a dividend. Thereby geonomics gets rid of two huge problems. It replaces taxes with full-value fees and replaces subsidies for special interests with a Citizens Dividend for people in general. Neither left nor right, this reform is what both nature lovers and liberty lovers need to promote, right now.

shaped by reality. In the 1980′s, the Swedish government doubled its stock transfer tax. Tax receipts, however, rose only 15%, since traders simply fled to London exchanges. Fearing a further exodus, the Swedish government quickly rescinded the tax altogether. (The New York Times, April 20) That willingness to tax anything leads us astray. Pushing us astray is that unwillingness to pay what we owe: rent for land, our common heritage. Assuming land value is up for grabs, we speculate. We cap the property tax on both land and buildings and the rate at which assessments can go up; while real market values rise quicker, assessments can never catch up. Our stewards, the Bureau of Land Management, routinely sell and lease sites below market value, often to insiders, says the Government Accounting Office. Once we grasp that rent is ours to share, we’ll collect it all, rather than let it enrich a few, and quit taxing earnings, which do belong to the individual earner. That shift is geonomic policy.

a study of a phenomenon David Ricardo noted going on two centuries ago. When wine grapes rise to $10,000 a ton from the very best land (last year, cabernet sauvignon commanded an average of $4,021 a ton in the Napa Valley), then vineyard prices soar from $18,000 an acre in the 1980′s to $100,000 an acre five years ago and now for a top pedigree up to $300,000 an acre (The New York Times, April 9, via Wyn Achenbaum). Pricey land does not make wine pricey; spendy wine makes land spendy. While vintners make their wine tasty, nature and society in general – not any lone owner – make land desireable. Steve Kerch of CBS’s MarketWatch (April 5) notes that much of what a home sells for on the open market is a reflection of intangible factors such as what school district the house sits in. The price the builder has to pay for the land also tends to be driven by the same intangibles. Because the value of land comes from society, and because one’s use excludes the rest of society, each user owes all others compensation, and is owed compensation by everyone else. Sharing land’s value, instead of taxing one’s efforts, is the policy of geonomics.

suitable for framing by Green Parties. When Greens began in Germany two decades ago, they defined themselves as neither left nor right but in front. Geonomics fits that description. The Green Parties have their Four Pillars; geonomists have four ways to apply them:

Ecological Wisdom. Want people to use the eco-system wisely? Charge them Rent and, to end corporate license, add surcharges. To minimize these costs, people will use less Earth.

Nonviolence. Want people to settle disputes nonviolently? Set a good example; don’t levy taxes, which rely on the threat of incarceration, to take people’s money. Try quid pro quo fees and dues.

Social Responsibility. Want people to be responsible for their actions? Don’t make basic choices for them by subsidizing services, addicting them to a caretaker state. Let people spend shares of social surplus.

Grassroots Democracy. Better have grassroots prosperity. Remember, political power follows economic. Pay people a Citizens Dividend; to keep it, they’ll show up at the polls, public hearings, and conventions.

close to the policy of the Garden Cities in England. Founded by Ebenezer Howard over a century ago, residents own the land in common and run the town as a business. Letchworth, the oldest of the model towns, serves residents grandly from bucketfuls of collected land rent (as does the Canadian Province of Alberta from oil royalty). A geonomic town would pay the rent to residents, letting them freely choose personalized services, and also ax taxes. Both geonomics and Howard were inspired by American proto-geonomist Henry George. The movement launched by Howard today in the UK advances the shift of taxes from buildings to locations. A recent report from the Town and Country Planning Association proposes this Property Tax Shift and their journal published research in the potential of land value taxation by Tony Vickers (Vol. 69, Part 5, 2000). (Thanks to James Robertson)